The United States and Colombia: Socioeconomic relations since XIX century a brief

The United States and Colombia have long economic and political good relations. For instance americans added value in gold and silver extraction through Pato Mines, they added valued in Crude oil extraction with Standard Oil New Jersey and OXY, they aded value in production of massive products through 3M and Quaker and added value through english teachers in universities. Alliance for Progress under Kennedy administration and Plan Colombia under Bill Clinton administration are evidence of political agreements to get   socioeconomic progress in Colombia. Nowadays there are at most 74,757 american residents in Colombia they work in many economic activities, moreover big business between these two countries reached a Foreign Direct Investment as stock in Colombia of US$18,530 million in 2012 and a trade balance in favor of Colombia of US$7.5 billion in 2012. However, Colombia exports to the United States mainly basic products such as crude oil, coal, fruits, coffee and flowers, therefore FTA signed in 2012 has not brought the expected results yet, then Colombia has to improve her industrial sector through a bunch of variety products and improve technology to achieve economies of scale. There are other issues in the United Sates and Colombia’s agenda, for instance the strategy to fight against cocaine production, as one realizes military strategy shows a decline while socioeconomic investment to improve alternative crops and improve basic needs from Indigenous group has increased, nevertheless corruption and cocaine production let getting a difficult socioeconomic environment in whole Colombia, one tempts to think on cocaine production under monopoly market legalization.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

The USA citizens started to come in massive volume around 1843, they came to trade with Colombians and work in mining activity. Americans as a residents in Colombia went from 83 in 1843 to 1,607 in 1928. Business that took their attention were textiles trade such as native hats (Jipijapa hats), fruit such as banana, coffee, silver, gold, sugar, cotton and tobacco, a main international trade firm was G. Amisink from New York. The main american firms by those days were the United Fruit Company that invested about US$4 million in Colombia between 1899 and 1912 (US$105 million at 2012 British Petroleum chained prices) and the Pato Mines Ltd located in Antioquia region (it was a subsidiary of Oroville Dredging Company of California) at the end of XIX century. The big issue through these years was the Separation of Panama in 1903 that blocked the immigration of americans to Colombia due to adverse socioeconomic environment. After 1912 Americans were interested in crude oil in Santander region, they worked hard to get the The Mares Concession through Tropical Oil Company (affiliate of Standard Oil New Jersey). They started to export crude oil on 20’s when Colombia faced huge volume of coffee production and the USA payment due to Separation of Panama. In 20‘s there were important americans such as Edwin Kemmerer that helped to set up the Colombian Central Bank and other government bodies. American residents in Colombia increased to reach 9,025 in 1970 as figure 1 shows. From 1935 to 1970 americans worked with locals and other foreigners to develop the industrial sector in Colombia, they brought massive consumption through Quaker S.A, 3M, AT&T, IBM and others. From 1970 to 2000 Americans as a resident showed an increase to reach 15,062 people in 2000, nevertheless the immigration rate was lower than years before, it can be explained by colombian internal war conflict but this trend changed since 2000 due to better security condition achieved, this secure environment can be reached thanks to international help, the United States has played an important role to get this result through Plan Colombia, it is fair to point that these resources have changed through years, at the beginning were given to reduce narcotics trade, then to fight against terrorism and nowadays they are mostly taken to support alternative crops and improve living conditions in regions where cocaine is grown. Plan Colombia is not the only support from USA, the Alliance for Progress under Kennedy administration was important in Colombia also, there are blocks in Bogotá named Kennedy due to the uses of these resources.

Figure 1. Americans in Colombia 1843-2011*

(number of people)

*2011: with preliminary information from migration office.

Source: Colombia census, World Bank and Colombia migration office.

Nowadays there are at most 74,757 americans as a residents in Colombia, they can be a bit less. Most of them live in Bogotá with 30.5% of total american residents in Colombia, they like Medellín, Pereira, Cali, Maicao, Barranquilla, Chía and San Andrés as figure 2 shows. Of course, there are few americans in other places in Colombia. Most of americans in Colombia are single with 82.8% of them, those married are 14.5%, separated 1.3% and widower 1.4%. Most of americans are men with 52.7% of total americans as residents in Colombia and they are young, those between 33 and 45 years old are 29.9% of total american residents. Unfortunately there are 42 americans who are in trouble with Colombia justice in 2013, most of them are charged by cocaine traffic. Americans work in most of economic activities in Colombia but the main one is in education as a english teachers. One can find americans as managers in hotels or enterprises and as employees in crude oil companies or universities. Americans are a big foreign group in Colombia after Venezuelans and before Ecuadorians. This information come from public access information: 2005 Census sample, local migration office and INPEC. 

Figure 2. Americans residents current location in Colombia

(Share % of total americans in Colombia 2005-2011)

Source: Colombia census, World Bank and Colombia migration office.

Big business between Colombia and the United States

The big business between Colombia and the United States started in XIX century as was mentioned, the FDI as stock invested in Colombia went from US$247 million of 2012 BP chained prices in 1897 to US$18,530 million in 2012 as figure 3 shows. The main activity is extraction of crude oil under Occidental Company (OXY) located in eastern plains (Llanos Orientales) but there is a bunch of economic activities where they are such as Hilton Hotel, Delta Airlines, Forever products, Bloomberg financial services, McGraw Hill editions and so. The main activity of american big firms is in wholesales and retail sales in Colombia with 35.8% of total big firms in 2012 (there were 226 big american firms in Colombia in 2012), 22.1% of these firms are in manufacture sector and 17.3% in real estate sector. However, the number of big firms from the United States showed a decline since 2008 when there were 286. Most of american firms are located in Bogotá with 170 firms out of 226 in 2012, Medellín with 11, Cali with 7, Chía with 2 and Yumbo with 3, there are other places that have american firms such as Ibague, Cota, Cartagena, Puerto Tejada, Funza and so. There are economic sectors that american firms can take advantages in Colombia such as agroindustrial production on Colombian planes, public utilities such as energy (electricity), college education and technology in communications and transport.

Figure 3. The United States FDI stock in Colombia 1897-2012

(US$million 2012 chained British Petroleum prices)

Source: Bureau of Economic Analysis USA and specialized books.

Colombia has traded with the United State before her independence but the volume increased after her independence, the trade indicator showed an increase from 1836 to 1950 as figure 4 shows (exports plus import  between Colombia and USA divided total exports plus imports from Colombia in %), the main products exported were basic ones and those imported were high added products. Since 1950 the trade indicator showed a decline due to lack of variety of products to export and restrictions to develop industrial sector in Colombia such as Law 444 of 1967 and Decision 24 from Andean Pact, nevertheless the trade indicator increase after 1991 due to economic openness but it is was through increasing in imported goods and crude oil and coal exports. The Free Trade Agreement signed in 2012 has not brought the expected benefits due to lack of modern industrial sector that can produce variety of products under economies of scale. Nowadays the main exported product from Colombia to United States are crude oil, coal, emeralds, gold, flowers coffee, bananas, basic plastics and few types of textiles. Imports from the United States to Colombia are manufactures such as gas for jets, computers, chemicals, vehicles and medical equipment. In the last 14 years the trade balance is in favor of Colombia, the value of exports menus imports was US$8.3 billion in 2011 and US$7.5 billion in 2012 both in favor to Colombia, therefore crude oil and coal support manufactured imported goods from USA. Colombia has crude oil reserves for the next 7 years and coal for the next 76 years under actual rate of extraction.

Figure 4. International trade Index* United States-Colombia 1846-2012

(% percentage)

Source: Urrutia (1970) and  United Nations Data.

The United Sates’s GDP cycle and Colombian’s cycle is showed in figure 5, as one can see it is countercyclical form most of the years (the correlation coefficient is -0.14) but after 2008 it appears that cycles are aligned, same picture is evidence with United Kingdom’s cycle, therefore one can be tempted to point that 2008 brought cycles alignment (time will point the answer), meanwhile, it is fair to point that it is a great moment to americans invest in Colombia and Colombians invest in the Untied States due to cycles are going through their upward path. However these paths have to be supported with  flexible monetary and fiscal policies still. 

Figure 5. Colombia’s cycle and United States’s cycle

(1977-2013 quarterly normalized data)

Source: Colombian Central Bank and Bureau of Economic Analysis USA.

Plan Colombia and her accounts

Plan Colombia is a set of accounts that help to fight agains terrorism and narcotics production in Colombia. The financial support has changed in the last years according to USA budget, for instance monetary support to local Armed Forces showed a decrease from US$98million in 2003 to US$30 million in 2013 and an expected of US$28.5 million in 2014. On the other hand, the economic support has taken the path to help those local citizens who are vulnerable such as Afro-Colombians and indigenous group (see Executive Budget Summary, Function 150 & Other International programs 2014 pag 93). This is a clear evidence about the priorities in cocaine fight, the armed war decreased the cocaine production to the lowest values from 695 tonns in 2001 to 345 tonns in 2011 but its cost was too high. As I pointed in my weekly note of march 14 of 2012 and july 14 of 2013: we are close to finish internal war but there are two issues that I think we have to work on, the first one is local government corruption through efficient uses of public resources and the second one is cocaine monopoly market regulation under legality.

Industrialization and globalization, the missed achievement in the XX century in Colombia

Colombia has faced two waves of industrialization since her independence, the first one started in 1820 when foreigners brought technology to extract gold and silver, brought technology to build ships and produce beer, sugar and chemicals, it finished in 1905. The second one started in 1933 when urban population demanded finished products such snacks, clothes, refrigerators, paper and so, it can be taken as the golden period of Colombia industrialization, many foreign firms came to Colombia, it ended in 1976. After this year globalization points the path to follow, in this case is  to work hard in economies of scale and variety of production, each country has to produce those goods that face economies of scale and the variety is the clue, engineering and marketing play an important role in market mechanism and society welfare. Developed economies and some developing economies are ready to take this challenge but others are not. Colombia is in the last group, her socioeconomic path since 1948 ignored globalization duties and benefits. Nowadays, Colombia faces her previous decisions with an old local industrial sector that does not have many goods to offer to the World. Moreover, policies to avoid globalization through deny Free Trade Agreements is to contribute to underdevelopment, instead an industrial agenda is required to bring economies of scale where wages are fair.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be download @ PDF

1880-1900

Colombia showed her first steps in serial production after her independence. Most of industrial production through XIX was artisanal, for instance beer, hats and sandals. Nevertheless through foreign immigration Colombia started to develop this sector through iron production in the hardware stores called Pacho, La Pradera and other hardware stores locates in Cundinamarca and Antioquia mainly, they were managed by english and french engineers and supported by foreigners and locals. Production of chemicals such as sulfuric acid, hydrochloric acid, nitric acid and sulfate were made by foreigners from Spain and France, these chemicals were taken to extract gold and silver and massive production of batteries used by local government in communications. There were other sectors that faced important advances such as production of ships to surf Magdalena river, this company was managed by Bernardo Elbers a Germany guy; massive production of beer through Cervecería Alemana (nowadays Bavaria) and sugar production through La Manuelita, these firms were set up with foreign capital and managed by foreigners. However, most of these firms became bankrupt due to internal war conflicts, difficult access to inland due to colombian geography, spread of tropical diseases, poor financial (banking) sector and low demand due to low income and low population, Colombia counted with 2.3 million of people in 1851 and 3.8 million in 1900, most of them were farmers. Industrial Gross Domestic Product (GDP) shared with 15.0% at the end of XIX century, her 20 years annual average growth rate was 1.3% and there were 3 big foreign firms in Colombia as figure 1, 2 and 3 show.

Figure 1. Industrial GDP Colombia 1900-2012

(%, as a share of total GDP Colombia)

Source: Oxford Latin American Economic History Data and Bureau of Statistics DANE.

1901-1930

During internal war 1899-1902, Colombia faced bloody scenarios in most of the country but mainly in Santander and Costa Atlántica regions, industrial sector faced a deep decline in textile production, nevertheless in some places such as Valle the sugar factory La Manuelita opened a big factory. The separation of Panama from Colombia in 1903 was a big hit that brought a xenophobia environment that decreased foreign immigration. Since the beginning of XX century Colombia traced her economic tendency for primary products such a coffee production, banana production, sugar production and minerals extraction. The coffee started to take place in Colombia economy and international prices hit colombian economy in 1920 along the WWI, industrial sector was on second place, most of finished products were imported and few were made in Colombia such as some type of textiles, matchsticks, tiling, glass and easy machines to produce sugar and coffee. Crude oil production was the business since 1916 and took attention of government, the main firm was Standard Oil New Jersey through Topical Oil company, at the end of 20’s Colombia exported crude oil to USA. It is right to point that WWI brought lack of imported goods, therefore local industry started to supply similar goods but as soon as it ended, then foreign goods were cheaper than local ones. Industrial GDP shared with 8.6% in total GDP in1930, her 20 years annual moving average growth rate was 1.2% in 1930 and there were 9 big foreign firms in Colombia.

1931-1950

The crash of 1929 hit international prices, income from coffee production and crude oil production, moreover Colombia faced high foreign debt that took through  20’s. These facts brought a Balance of Payments Crisis between 1930 to 1932 that were sorted with foreign transaction taxes and exchange rate regulations. Colombia was not absent of external debt default in this period. Industrial sector took these events to produce cheaper goods that were imported before, moreover the real estate investment was high during 20’s and let reducing internal transport cost and there were more urban population who demanded manufactured goods, Colombia counted with a population of 7.8 million in 1935. Period between 1931 and 1950 can be taken as the golden period of Colombia industrialization, for instance big firms in this sector were 28 in 1900 while 1,945 in 1946, foreign big firms were 3 in 1903 and 26 in 1946. Colombia citizens started to enjoy massive products made in Colombia such as snacks, soft drinks, drugs and she produced intermediary products such as tires and cars’s parts. However, there were a bloody event in 1948 that took Colombia economy few steps back, it was the murder of democratic politician Jorge Eliécer Gaitan, this unfortunately event brought the beginning of violence period in Colombia, foreign capital flew to source countries and local capital flew also to avoid confiscation. The Industrial GDP shared with 17.0% in total GDP and her 20 years annual moving average growth rate was 8.0% in 1950.

Figure 2. Industrial GDP growth in Colombia 1900-2012

(% annual moving average 20 years)

Source: Oxford Latin American Economic History Data and Bureau of Statistics DANE.

1951-1970

After 1948 there were many economic policies in short time due to Balance of Payments crisis at beginning of 50’s, for instance many types of exchange rate according to economic sector, a new foreign capital regulation where financial sector, media sector were strongly regulated and foreign capital was supervised in order to be mixed capital (it was an obligatory nationalization, not all capital but a share of 45% as minimum), most of these decisions were consigned in Law 444 of 1967 and Andean Pact Decision 24 of 1970. Industrial sector was in the government agenda but against free market environment, up to 1967 Colombia followed Imports substitution agenda through high tariff for imported goods (this strong policy started in 1931) but after this year Colombia decided to complement this policy through promoting exports under obligatory volume for foreign firms and through buying government bonds to promote industrial sector, therefore there was hard times for foreign firms mainly for those from industrial sector. Industrial sector showed low growth and its share in Gross Domestic Product was the lowest in the region. The volume and international prices of crude oil and coffee made Balance of Payment crisis affordable at the end. Although there were hard restriction to invest in industrial sector, few foreign firms decided to invest in Colombia, most of them were pharmaceuticals, firms that made rubber and paper, nevertheless they played with cost, profits and international trade to avoid taxes. The Industrial GDP shared with 20.7% of total GDP in 1970, her 20 years annual moving average growth rate was 6.5% in 1970 and there were 62 big foreign firms in Colombia in this year.

1971-1990

This period can be called the birth of new internal war conflict in Colombia. By 1970 Colombia started to produce high volume of cocaine, guerrilla pushed down government through terrorism in whole Colombia and along restrictive foreign investment, then the industrial sector started to decline as a share of GDP. In 1985 guerrilla took over the Place of Justice in Bogotá downtown. Smuggling was other headache for government, this activity contributed to erase the industrial agenda in Colombia, commodities came to Colombia through Atlantic Cost ports as smuggling, big foreign firms in industrial sector passed from 64 in 1971 to 116 in 1990. Moreover, the new mining exploitation took place in Colombia, in this case were coal and ferronickel that along with crude oil and coffee production pushed economy to the second Dutch Disease (the first one was in 20’s due to crude oil, coffee production and external debt). The last events that blocked the development of industrial sector through this period were the small financial sector evidenced with low coverture and high homicide rate around whole Colombia. The Industrial GDP shared with 19.9% in 1990 and her 20 years annual moving average growth rate was 5.0% in 1990.

1991-2012

In 1991 Colombia changed her economic model, from closed model to open economic model, the foreign investment restrictions were suppressed and it was easier import finished goods such as sneakers, lollipops, cars, clothes and so, these products were cheaper than before. Financial sector and media sector started to be attractive to foreign multinationals, nevertheless Colombia was not competitive in local manufactured commodities, there were few such as basic plastics, some types of textiles and shoes. Colombia exported basic products mainly such as banana, crude oil, coal, ferronickel and flowers. Production of coffee started to decline due to the end of international quotas in 1989 that benefited to Colombia and the low productivity that Colombia faces compared with Vietnam, Brazil and nowadays Peru. To afford these imported commodities, the basic exports played an important role but the result was a negative trade balance that meant an increase of foreign debt. This period was the worst scenario in Colombia: the homicide rate reached 77 per 100 thousand of inhabitants in 1992, the troops in guerrilla were 22,000 men in 2002, the cocaine production achieved 695 tonns in 2001 and Colombia was close to be classed as fail democratic state. Industrial sector in Colombia showed an agglomeration in “safer” places such as Bogotá, Barranquilla, Medellín, Bucaramanga, Cucuta and Cali. After support from USA that started in 1996 to fight agains terrorisms and cocaine cartels, Colombia could recover her path in 2005 when FDI increased, tourism came back and big multinationals took place again in Colombia such as SabMiller in 2005. Nevertheless, all these past facts blocked the industrial development in Colombia, therefore she was not ready to face the new economic openness that started in 2005 with Free Trade Agreements with Chile, Mexico, The United States, Canada and Europe. Moreover a main economic partner Venezuela changed her economic model where Colombia faced a closed economy to export the few competitive manufactured goods. Since 2003 Colombia faced the third Dutch Disease due to crude oil, coal and ferronickel prices, production and royalties mismanaged. The Industrial GDP shared with 11.9% of total GDP in Colombia in 2012, her 20 years annual moving average growth rate was 2.0% and there were 349 big foreign firms in Colombia in this year. 

Figure 3. Foreign big firms in industrial sector Colombia 1886-2012

(Number of firms)

Source: Own calculations from official data and published papers.

1900-2010 and international perspective

The colombian industrial GDP as a share of her total GDP is located at the button in the list of countries in the region as figure 4 shows. There have been a deindustrialization since 70’s, most of countries in the region have faced a decline in their industrial sector, it can be attached to the new agenda of globalization were countries produce those goods that face lower costs and economies of scale, therefore this decline can be taken as a period of adjustment in this sector, one tends to think that there are industrial products in Latin America that face this technology such as basic plastics, pharmaceutical, some kinds of textiles and shoes, moreover these is the period of set down the variety production where engineering and marketing play an important role in market mechanism and social welfare.

Figure 4. Industrial GDP Latin America countries 1900-2010

(%, as a share of total GDP, smoothed series)

Source: Oxford Latin American Economic History Data.

Wrapping up the end of Colombia “internal” war conflict: the cocaine production case

The World society faces a big issue since 1970 when pure cocaine started to be traded in huge volumes, unfortunately Colombia is a focal point in this trade as a producer and consumer. Coca production along corruption and lack of security for democracy have brought an internal war in Colombia, for instance this month there is an actively protest in Catatumbo region due to coca crops eradication, the result is four murders, it is a small picture of Colombia conflict, whole Colombia can be divided by regions of cocaine crops production: Catatumbo, Sierra Nevada, Sur del Bolivar, Amazonia, Pacífico, Putumayo-Caqueta and Meta-Guaviare, these regions face the internal war conflict every day (this regions are whole Colombia). United Nations as World society along Colombian government have worked on Drug Policy program but it is not enough still, to improve this program the legality of consumption and production have to be in this agenda. The actual program takes coca leaf eradication, alternative crops and policies in consumption as mechanism to reduce coca market, nevertheless cocaine production faces huge profits due economies of scale and potential demand around World (high income and low income countries), these profits can remove positive results from eradication and alternative crops through higher salaries to local farmers who grow coca leafs, it does not matter if alternative crops go first that eradication does. The supplier of cocain enjoys a monopoly market with huge profits, for instance the cost of pure cocain kilogram was US$2,468 in 2011 in Colombia while market price abroad was US$80,000!!! (from my point of view, coca productions is better business than tabacco, spirits, colas drink or legal drugs), it is hard to believe that potatoes crops, tomatoes crops and yucca crops can be competitive when coca crops can increase more than twice the minimum salary in Colombia for small farmers who care coca crops. This note highlights the cost of illegal production  of cocain in Colombia and how a regulated legal monopoly can wrap up the end of Colombia “internal” war conflict.

Author: Humberto Bernal,  

Economist,

e-mail: zhumber@gmail.com

Twitter: Humberto_Bernal

It can be down load @ PDF

Cataumbo a small picture of Colombia reality 

Catatumbo is a region located in the northwest of Colombia, she counts with six municipalities, it is inside of Norte de Santander local government administration, she borders with Venezuela as figure 1 shows. This region is rich in crude oil, the volume of production was 3,294 barrels per day in 2011 and 3,439 in 2012, Colombia produced 915,263 barrels per day in 2011 and 944,119 in 2012, nevertheless the only municipality that gets important volume of royalties is Tibú. Catatumbo counts with 727,915 hectares (Ha) out of 114,5 million Ha in Colombia. One can find 97 types of crops in Catatumbo region where the main ones are rice, yucca, plantain, potatoes, sugar cane, tomatoes and coca leaf. Catatumbo is highlighted through local media due to closeness to Venezuela, coca leaf crops and as an internal war conflict focal point. Nowadays, citizens from this region, mainly frames, make other actively protest due to coca leaf crops eradication, this eradication was low before 2011 when reached 92 Ha from 2,030 Ha in 2011. Central government points that this protest comes from lack of government social investment in this region but this assessment is not true at all, the big issue is farmers protest due to coca leaf crops eradication which is supported through political environment and coca managers, in this case guerrilla FARC. I work on these issues in this note, moreover I claim for coca production legalization through international monopoly management through United Nations to wrap up the end of Colombian “internal” war conflict.

Figure 1. Catatumbo region by municipality in Colombia

Source: Own calculations Stata 12.1

Catatumbo is an average region in Colombia, as this region there are others where coca leaf are growth such as Amazonia, Meta-Guaviare, Orinoquía, Pacífico, Putumayo-Caqueta, Sierra Nevada and Sur del Bolivar, in other words through whole Colombia (coca crops takes 64,000 Ha after eradication in 2011). Coca production is management by guerrilla FARC mainly, therefore one can take this production as monopoly. Catatumbo has a population of 108,873 in 2011 classed as table 1 shows, Tibú is the main municipality with a population of 35,545. Catatumbo is poor in tertiary education, for instance Convención municipality just counts with 4.4% of her population with finished tertiary education and Teorama municipality with 1.4%. Citizens in poverty state count with no less than 45.1% of Catatumbo’s citizens, for instance El Carmen municipality showed an Unsatisfied Basic Needs (UBN) of 66.5% in 2010. Democratic participation is low with no more than 63% of total people in age to vote in 2011. This region shows a high homicide rate per 100 thousand of inhabitants, for instance El Tarra municipality showed a homicide rate of 129 in 2011!!!. These municipalities depend in huge from central government economic resources, for instance 87.5% of Convención municipality’s government income came from central government in 2010 and the local investment per capita is above of national investment per-capita, while national investment per capita was US$134 in 2010, El Carmen municipality invested US$327 per citizen (this investment should had been invested in real projects but it went to corruption). These indicators let coming up with a conclusion: Catatumbo region is a poor region inside of huge mineral and natural resources that shows monopoly management, Crude oil is managed by few foreign firms, coca crops are managed by guerrilla FARC and public resource are managed by corruption, one can be tempted to assert that this socioeconomic disease comes from local government corruption and coca eradication. Corruption lets using economic resources inefficiently and coca eradication brings armed conflict, moreover this conflict pushes down by force farmers’ income.

Table 1. Socioeconomic indicators Catatumbo’s municipalities in Colombia

2010-2011

Municipality	Population (Number)	Tertiary education (%)	UBN (%)	Democracy participation* (%)	Homicide rate*	Dependency from central government (%)	Annual investment per-capita  (US$)
Convención	14,974	4.4	45.1	47	102	87.5	210
El Carmen	15,149	2,0	66.53	58	33	49.9	327
El Tarra	10,831	1.8	73.11	61	129	73.6	312
San Calixto	12,992	2.2	73.89	62	46	81.8	238
Teorama	19,382	1.4	56.53	63	101	84.4	277
Tibu	35,545	2.4	56.76	45	25	82.8	334
Colombia	46,044,601	12.2	27.8	67 (49)	35	--	134

*: data for 2011.
(...): national participation in presidential elections 2010. The other figures are for local elections 2011.
Source: Bureau of Statistics Colombia (DANE), Federación Nacional de Municípios Colombia, Medicína Legal Colombia and Own calculations.

Catatumbo is one of main regions that produces cocaine in Colombia. Total land taken to grow coca leaf were 1,938 Ha out of 64,000 Ha in Colombia in 2011, this land is classed as table 2 shows, Tibú is the main region that grew coca leaf in 2011, from this land 92 where eradicated and the total pure cocaine production was 19.26 metric tonnes (mt) in 2011 out of 345 mt in Colombia in 2011. The illegality of this crops brings armed forced conflict that counted with 32 armed fights in 2008 and 2009 (typical years), moreover the number of cumulated displaced people from this region is 62,432 people and a homicide rate above of 25 per 100 thousand of inhabitants. These facts: corruption, coca production, armed conflicts, displaced people and homicide rates are taken by politicians to worse the outlook, the last week the result was “another” four murders. 

Table 2. Socioeconomic indicators Catatumbo’s municipalities in Colombia

2010-2011

Municipality	Displaced people (Number)	Coca crops no eradicated (Ha)	Coca crops eradicated  (Ha)	Pure cocaine production  (mt)	Number of fightings between guerrillas, Paramilitaries and legal armed forces  (Number)
Convención	10,251	180	2	1.79	6
El Carmen	3,477	212	10	2.11	5
El Tarra	10,926	410	0	4.07	7
San Calixto	4,224	66	0	0.66	No information
Teorama	4,609	298	14	2.96	3
Tibú	28,945	772	66	7.67	11
Sub total	62,432	1,938	92	19.26	32
Colombia	5,405,629	64,000	34,170	345	626

Source: Federación Nacional de Municípios Colombia, United Nations and Own calculations.

Cocaine as monopoly business

Pure cocaine market is huge in term of consumers, according to United Nations there were about 19.5 millions of consumers in 2010 but it can be more due to pure cocaine is spreading around the World and her technology is under economies of scale, it means as the volume of production increases their Average Cost (AC) and Marginal Cost (MC) per kilogram decreased, figure 2 shows the relation between cost per kilogram and volume of production. One realizes that this cost decreases as volume increases, for instance in 1979 the volume of production was 90 thousand of kilograms while her cost was US$51,326 per kilogram at 2005 prices, nevertheless in 2001 the volume traded was 695 thousand of kilograms and her price was US$1,731 per kilogram at 2005 prices, therefore there is a clear evidence of economies of scale. 

Figure 2. Pure cocaine cost and production in Colombia 1975-2011

(US$ and kilograms)

Source: Own records from specialized books and United Nations and Own calculations.

Pure cocaine market is managed as Monopoly Market. Bolivia, Colombia and Perú are main countries that produce pure cocaine in the World. In Colombia case those who manage the pure cocaine chain are guerrillas and paramilitaries, they produce pure cocaine at her MC and sell it at market price that is driven by market demand forces, figure 3 shows the huge difference between market price (red dashed line, right axis) and MC (blue line, left axis), as example in 2011 the cost per kilogram was US$2,468 at current prices while market price was US$80,000 per kilogram at current prices, really it is a huge profit. This profit will make the difference between right World Drug Policies as I try to explain below.

Figure 3. Pure cocaine cost and market price

(US$ per kilogram)

Source: Own records from specialized books and United Nations and Own calculations.

Taking data from 1975 to 2011 from serious reports and specialized books about pure cocain market in Colombia, I run an econometric model that takes into account pure cocaine production as monopoly market managed by FARC guerrilla. The three main equation from monopoly as microeconomic textbooks point are Market demand, Marginal Cost (MC) and Marginal Income (MI), these equations let getting the equilibrium (market price, marginal cost and volume), results are reported in table 3, they are controlled by crude oil price at 2011 prices, it is taken as input costs and Gross Domestic Product per capita (GDP) at 2005 prices from Euro Zone, the United States, Japan and Australia, they are the main cocain consumers due to they are willing to pay (at the end, market size will increase due to economies of scale: more volume demanded will let lower cost per kilogram and this decline will increase World demand from low income countries). Results from this table can be read as pure cocaine production increase in 1.0%, then the MC shows a decline in 1.78%; the increase in crude oil price in 1.0% lets an increase of 0.47% in MC. For market demand an increase in volume demanded in 1.0% lets getting a decrease in price in 2.32% (This is an example of the Law of Demand). MI behaves as theory points also, its slope is negative and the curve is under market demand curve. Figure 4 shows result for 2011 values, there is an interesting result for World Drug Policy, the Average Cost (AC) that let getting zero profits for guerrilla FARC are a market price of US$500 per kilogram (red letters in the figure). This result is so important due to monopoly managed under legality conditions have to set this price in order to take guerrilla out of the cocaine business, of course it brings more production-consumption but there is when World Society have to regulate this volume through storage without increasing price and  educational polices in school and universities as obligatory subjects.

Table 3. Monopoly market pure cocaine

(Variables in natural logarithms, 3SLS model)

Variable	MC	MI	Market demand price
Pure Coca  (volume in kg)	-1.78	-3.41	-2.32
Crude oil price  (US$ chained of 2011)	0.47
GDP per capita main countries (US$ chained 2005)		5.00	4.98
Constant	28.95	No constant	no constant
Observations	37	37	37
R2	0.75	0.98	0.99

All coefficients are significative at 0.05 level under 1,500 Bootstrap replications.

MC: Marginal Cost,

MI: Marginal Income,

Source: Own calculations Stata 12.1.

Figure 4. Monopoly market pure cocaine

(US$ and kilograms)

Source: Own calculations.

Conclusions

Cocaine production can be taken as monopoly market managed by guerrilla FARC in Colombia, the cost per kilogram was US$2,468 in 2011 and the market price was US$80,000 per kilogram in 2011, it is a huge profit that feed Colombian internal war conflict, as evidence nowadays  there is other actively protest in Catatumbo with four murders.

Cocaine production shows economies of scale, as volume demanded increases, the price per kilogram face a reduction, moreover there is a global effective and potential demand (more than 19.5 million of people, this number increases every day), it is not just a consumption problem in high income countries, it is a global consumption issue. Therefore, policies to prevent coca leaf production such as eradication and alternative crops for farmers is not enough, it have to come with:

Consumption legalization along obligatory signatures in high schools and universities where Drug consumption is the issue,

Production legalization managed by international body as United Nations where coca price has to be lower than cocaine Average Cost to avoid illegal production.

The Average Cost as a maximum price takes guerrilla and others cocaine producers out of the business, the other way there is a huge room to produce pure coca in the illegality scenario. To make clear this point, if cocaine price is not regulated under legality, then guerrilla can be competitive in farmers’s income although governments gives alternative crops. Profits from coca production are huge to compete with profits from tomatoes crops, potatoes crops and rise crops. The point is farmers will grow few hectares of potatoes, tomatoes and rise that let not getting economies of scale as coca production does.

References

Data can be download @ Stata file.

Do file can be download @ do.file.

Note: Cocain production from 2001 is calculated by Office of National Drug Control Policy (USA) but her calculations are below of United Nations, the UN report shows the procedure to calculate this production while the first one does not, therefore I took into account UN data.

Data comes from:

Castillo, F. 1987. Los Jinetes de la Cocaína. Editorial Documentos Periodísticos, pag. 150.

Henderson, J. 2012. Víctima de la Globalización: la historia de como el narcotráfico destruyó la paz en Colombia. Editorial Siglo del Hombre. 

Henman, A. 1978. Mama Coca. Hassel Free Press.

Junguito y Argáez. 1978. “La otra Economía”. Revista Coyuntura Económica, Fedesarrollo, Colombia, Vol VIII, No. 4, Diciembre.

Rocha, R. 2000. La economía Colombiana tras 25 años de narcotráfico. Cuadros 8 y 9 Anexo. editorial Siglo del Hombre.

Stainer, R. 1996. “Los ingresos de Colombia producto de la exportación de drogas ilícitas”. Revista Coyuntura Económica, Fedesarrollo, Colombia, Vol XXVI, No. 4, Diciembre.

United Nations (UNODC). 2003-2011. Censo de cultivos de Coca, Colombia. Editorial UN.